Analysts: Unilife Corp.'s history should be viewed in industry context

York County-based Unilife Corp. has seen plenty of drama in the past few months.

In August, the company's former vice president of integrated supply chain filed a federal lawsuit against Unilife, accusing the company of misleading investors and failing to comply with FDA regulations.

In September, Forbes published a blistering profile of the company titled "How Is A $329M Syringe Company Still Unprofitable After 11 Years?" with only the briefest of mentions that five of the six analysts following the firm still recommended the stock.

Shortly thereafter, Unilife announced the signing of a new long-term supply contract with global pharmaceutical company Sanofi, for use with its trademarked Lovenox anti-thrombotic therapy.

On Nov. 1, a Unilife shareholder filed a federal class-action lawsuit piggybacking off the August litigation.

On Nov. 11, Unilife announced an agreement with MedImmune, the global biologics research and development arm of AstraZeneca, to customize and supply devices from Unilife's platform of wearable injectors for use with biologics in MedImmune's pipeline.

Announcing the company's quarterly results the same day, Unilife CEO Alan Shortall said, "As I have said all along, fiscal year 2014 is the inflection point for Unilife when we begin to show rapidly increasing revenue." He also continued to tout a bevy of pending commercial deals he has been talking about for a while now.

Shortall's statement was a bold one — and exactly what Unilife's audience has come to expect from the leader who has been described as the consummate salesman. Throughout Unilife's history, Shortall has promised one bright horizon and enormous market after another.

First it was Unitract, "the world's first and only known safety syringe"; it no longer appears on the company's website. Then it was Unifill, which essentially added prefilling to the Unitract concept. In the past few years, the company stepped up its research and development spending and now features a whole range of injectable drug delivery systems, including syringes that automatically mix or reconstitute drugs and an injector for the eye.

The company's financial progress, meanwhile, has not been from height to height. In July 2008, it signed an exclusive license agreement with what was then Sanofi-Aventis, with Unifill to receive an upfront fee of $16.4 million and Sanofi-Aventis to bear the industrialization costs. When Unilife subsequently moved to Pennsylvania, it got a $10 million federal mortgage guarantee and more than $5 million in grants and loans from the state.

But despite that, after coming close to turning a profit in 2009 with net losses of only $517,000, Unifill saw revenues plummet and losses mount yearly. By the end of its 2013 fiscal year, its revenues of just over $2.6 million were dwarfed by net losses of more than $63 million.

Putting it in context

All of this, analysts say, needs to be viewed in the context of the medical device and pharmaceutical industries.

The conditions are punishing, the barriers to entry high. It's not unheard of for companies in this space, especially startups, to spend years racking up big losses. But when a product makes it through development and testing and regulatory hurdles and becomes a major player on the market, the rewards can be staggering.

"In small cap med-tech land, you can't necessarily measure a company's value based upon whether it is currently earning money," says Unilife analyst Jeffrey S. Cohen of Ladenburg Thalmann & Co. Inc., which is based in New York.

"It's definitely normal to have high losses in the industry," says James Manser, vice president of policy and public affairs for Pennsylvania Bio, which represents the bioscience industry in the Mid-Atlantic region. It's a little like drilling wells, he says: You can dig a lot of dry ones before you hit a gusher.

Unilife has attracted some extremely talented people from the industry, Cohen says, and currently the competitive environment looks very favorable for Unilife, with its product portfolio, including wearable injectors, offering a nice utility for a number of companies.

"The bigger question for me is what type of business development arrangements are they going to be making going forward," Cohen says.

Unilife analyst Keith A. Markey of Griffin Securities Inc. says he thinks the company needs some deals that are not huge, at least initially, so it can build up its capacity. The Sanofi Lovenox deal can fit that model, because its initial requirements are not massive, Markey says. He also thinks the decision to invest more in R&D in the past few years will pay off.

"If you have only one product to offer clients, if they don't like it, you're kind of stuck," Markey says.

Unilife analyst Haris Khaliqi, of Foster Stockbroking Pty. Ltd., based in Australia, also sees much potential for Unilife in the biologic field, with the MedImmune deal as a promising first indication that the company is garnering interest from the industry.

Biologics are predicted to be a major factor in the pharmaceutical field in coming years, Khaliqi says, and the majority of them will require a customized device, with the drug and the device approved as a package. That means the payoff for a biologic deal may be years down the road, he says, but once the product hits the market, there's a low risk of device substitution.

"If he really can sign a number of deals across his portfolio, this thing's a home run," says Unilife analyst Jeremy Feffer of Cantor Fitzgerald.

To be sure, the MedImmune deal announcement was quite vague — but Feffer says that's pretty much to be expected of the pharmaceutical industry. On straight medical device companies, he says, it's fairly easy to go out in the field and talk to prospective users — but pharmaceutical companies generally won't talk.

Legal and technical considerations

As for the lawsuits, Unilife leadership was not available for comment on this story, but Shortall released a letter to shareholders saying Unilife is in full compliance with all applicable regulatory requirements and securities laws.

"I am confident that Unilife will prevail with regards to both of these claims and can assure you that Unilife will vigorously defend itself against these actions," Shortall wrote.

Feffer also notes that, generally, companies like Unilife are susceptible to daily manipulations, "so shorts (investors who expect to profit from a stock price fall) kind of have a field day with it" — something to keep in mind when considering the lawsuits and attendant publicity.

The stock has fluctuated quite a bit in recent months, dropping to $1.86 on May 8, then hitting $3.76 on May 13. On Aug. 20, it was at $2.67, and by Oct. 22 it was at $3.58. Nov. 7 was at $2.58 and, after a Nov. 11 earnings conference call and MedImmune announcement, it jumped to $3.17 on Nov. 13.

In the Nov. 11 call, Shortall said that, between open-market purchases and exercise of options, he has invested $4.7 million of his own cash since Unilife was listed on the Nasdaq in 2010, and the company has no intention of doing a secondary offering at that point.

"I think this should underline my supreme confidence in our current position, future outlook and overall corporate health," he said.

That argument has some power, analysts say.

"That always lends credibility," Feffer says. If Shortall were cashing out, that would be one thing — but instead, he's investing more heavily and selling Unilife hard. "He really believes in it."

Major shareholders

As of the latest report on Sept. 20, Unilife Corp. had 99,168,541 shares of common stock outstanding and three shareholders listed as holding more than 5 percent of the stock. Including Shortall, Unilife Corp.’s 10 directors and executive officers collectively own 10.8 percent of the stock.